Vanguard FA, Should we do it?

[Rianne]

I see the light! Studied the suggestions here. We did this adjustment in the last 2 days. Sold 400 shares of Kellogg, bought in the late 90's. 200 shares in IRA and 200 in taxable. Yesterday, DOW went down 500+, bought into Roth $6500 VG Total Stock Market and DH Total International.
We are staying the course. Had too many individual stocks and got rid of some, with a capital gain.

 

[pb4uski]

Not sure if it has been mentioned, but ideally keep your international stocks in taxable accounts... that way, you get a credit against your taxes due (better than a deduction) for foreign taxes paid. If you have international stocks in a Roth or tax-deferred account then that foreign tax credit is wasted since you can't claim it for holdings in such accounts.

 

[Rianne]

Total portfolio has 12% international. 50% of that in taxable, 50% in IRA. VG suggests higher in international, but we're good here. 60/28/12. Staying the course for the next 5 years.

 

[pb4uski]

Let's say that the 50% of international in the IRA is $x.

Absent tax consequences, you would be better off to sell $x of tax inefficient investments in your taxable and buy $x of international in your taxable account, then sell the $x of international in your IRA and buy $x of whatever it was that you sold in the taxable account.

Your AA is unchanged but you now get double the foreign tax credit.

 

[Which Roger]

Not sure if it has been mentioned, but ideally keep your international stocks in taxable accounts... that way, you get a credit against your taxes due (better than a deduction) for foreign taxes paid. If you have international stocks in a Roth or tax-deferred account then that foreign tax credit is wasted since you can't claim it for holdings in such accounts.

But this tax advantage is offset by the fact that Int'l Stocks pay more non-qualified dividends, which are taxed at a higher rate than qualified dividends.
In my experience, the question of where to put Int'l has been a wash.

 

[pb4uski]

You are right that there is a non-qualified dividend aspect... but IME the tax credit exceeds the ordinary tax on non-qualified dividends (VTIAX) so my effective tax rate on VTIAX income has been negative the last few years.

For 2017:

Dividends received:...100
Qualified dividends:....67
Non-qualified div:.......33
Tax at 12%.................4
Foreign taxes paid.......6
Net tax benefit............2

In the 22% tax bracket the tax on the $33 in non-qualified dividends would be $1 ($33*22%, -$6 foreign tax credit).... not bad and better than 15% for domestic equity dividends.

 

[stephenson]

Given the abundance of information now, i see little reason for an FA ... perhaps manage everything yourself, but don’t make sell decisions unless you talk to your “Don’t Sell Now” advisor who knows it isn’t a good idea to sell in a down market because the market will come back.

If you have a zillion dollars, don’t pay attention to the above

 

[Rianne]

K stock has been challenged child. A bit bi polar. Food stocks seem to go up when the market (as a whole) goes down. We're in a space where we do not want more income to keep ACA. But want to rid ourselves of our individual stocks. Now, what to do with Intel. Another challenged child that had so much promise.

 

[pb4uski]

.... We're in a space where we do not want more income to keep ACA. But want to rid ourselves of our individual stocks. ...

Do you have significant unrealized gains on the individual stocks? any unrealized losses?

 

[Rianne]

Significant? If we sold more unrealized, it might push us over the edge for ACA. A good portion of K stock bought before 2012 but in 401K. Some still in taxable. True for Intel too. I'm not sure how they figure out realized gains because so old. Bought back in the 90's. And I don't get how unrealized gains are taxed, if they are. And they shoot off dividends. How is that taxed? I get confused on all this stuff.

 

[pb4uski]

Gains are only taxed with realized. Dividends are taxed when received. If dividends are reinvested, then the reinvested lots have a basis equal to the dividend paid... as if you received the dividend in cash and then turned around and bought shares.

Unrealized gain is today's price less your basis (for individual stocks, typically what you paid plus any commission).... if positive then a gain... if negative then a loss.

Losses and be used to offset gains, so you could sell any loss positions first to crystalize your losses and then sell some gain positions to match so the net gain or loss would be nil or minimal and not impact your ACA subsidy.

 

[Ger0n1mo]

I signed up for a VG FA 6 months ago - about 2 years from retirement. I wanted someone to rebalance my portfolio more frequently than I will do on my own and use their expertise on the particular mix of funds. For example, I have read many blogs and forums (not this one) about the need to be invested in real estate and the value of REITs. The FA advised against it as their performance has been subpar with other investments (contrary to some blogs). I will use an FA for a short time. Once I am retired I will have much more time to actively manage my portfolio on my own.

 

[ERD50]

... Once I am retired I will have much more time to actively manage my portfolio on my own.

There is a solution to this that many of us take. Don't actively manage your portfolio. Then is doesn't take any time to actively manage!

STEP 1) Decide on an AA (you should already have this, from your current FA discussion).

STEP 2) Buy a Total Market Fund/ETF and a Total Bond Fund/ETF to match your AA.

That should take maybe 10 minutes. VTI and BND will do. The hard work is done (whew!). Now, once a year:

STEP 3) Re-balance if you feel like it. That should take maybe 10 minutes a year.

STEP 4) Enjoy life.

If you want to get real fancy, round that out with a little REIT fund, and an International fund. Or just don't bother. I doubt it will make much difference in the long run.

Don't forget STEP 4

-ERD50

 

[Rianne]

There is a solution to this that many of us take. Don't actively manage your portfolio. Then is doesn't take any time to actively manage!

STEP 1) Decide on an AA (you should already have this, from your current FA discussion).

STEP 2) Buy a Total Market Fund/ETF and a Total Bond Fund/ETF to match your AA.

That should take maybe 10 minutes. VTI and BND will do. The hard work is done (whew!). Now, once a year:

STEP 3) Re-balance if you feel like it. That should take maybe 10 minutes a year.

STEP 4) Enjoy life.

If you want to get real fancy, round that out with a little REIT fund, and an International fund. Or just don't bother. I doubt it will make much difference in the long run.

Don't forget STEP 4

-ERD50

ERD you can express simplicity with elegance and run through calculations like a ninja. Are you the same person?